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Modelling Ireland’s Exchange Rates - From EMS to EMU

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Author Info

  • Derek Bond

    (University of Ulster)

  • Michael J Harrison

    (University College Dublin)

  • Edward J O’Brien

    (European Central Bank)

Abstract

This paper attempts to model the nominal and real exchange rate for Ireland, relative to Germany and the UK from 1975 to 2003. It offers an overview of the theory of purchasing power parity (Ppp), focusing particularly on likely sources of nonlinearity. Potential difficulties in placing the analysis in the standard I(1)/I(0) framework are highlighted and comparisons with previous Irish studies are made. Tests for fractional integration and nonlinearity, including random field regressions, are discussed and applied. The results obtained highlight the likely inadequacies of the standard cointegration and Star approaches to modelling, and point instead to multiple structural changes models. Using this approach, both bilateral nominal exchange rates are effectively modelled, and in the case of Ireland and Germany, Ppp is found to be valid not only in the long run, but also in the medium term.

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File URL: http://www.ucd.ie/economics/research/papers/2007/WP07.18.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200718.

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Length: 35 pages
Date of creation: 17 Nov 2007
Date of revision:
Handle: RePEc:ucn:wpaper:200718

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Related research

Keywords: Purchasing power parity; fractional Dickey-Fuller tests; smooth transition autoregression; random field regression; multiple structural changes models;

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Cited by:
  1. Burcu Kıran, 2012. "Nonlinearity and Fractional Integration in the US Dollar/Euro Exchange Rate," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(3), pages 325-334, June.
  2. Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2009. "Exploring Long Memory and Nonlinearity in Irish Real Exchange Rates using Tests based on Semiparametric Estimation," Working Papers 200901, School Of Economics, University College Dublin.

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